Privatization: from promises to failure

The experience of the new social security system, based on the ‘advantages’ of private investment over a state-run system, has been a complete failure. Far from guaranteeing workers a dignified pension, privatization has established a system in which the saver has less control over his or her destiny. The new prevailing reality has failed to achieve the reform’s objectives of greater coverage, more transparency and the promised increase in retirement income.

The underlying orientation of neoliberalpolicies is the promotion of market pre-eminence, idealizing it as the bestmechanism for economic resource distribution. The role of the state is thuslimited to that of a mere overseer of private companies’ activities, andsocial objectives, such as citizens’ well-being, become subordinate tocapitalist investment profitability. However, a retrospective evaluation of theimplementation of such policies reveals results far removed from the theoreticaloutcome: the state has lost its jurisdiction in the productive area butmaintained a high profile in private investment bailouts, and was unable to meetthe challenges of a free-market economy. This is the framework of socialsecurity system reforms in Bolivia and other countries of the region.

In the case of Bolivia, pension system reform was presented as a socialnecessity – an argument that was supported by the clearly dysfunctional stateof the existing pension system in force for several decades – but was in factdesigned as a potential source of profit for private investment.

According to one of the main promoters of the reform (Peña Rueda, 1996), thereplacement of the ‘pay as you go’ (PAYG) social security system wasjustified by data suggesting its virtually bankrupt state:

• The proportion of active workers to pensioners was three to one, which isinsufficient to financially support the system and much less than what isconsidered to be the ideal proportion (ten to one).• The coverage of the system was very limited with only 314,437 regularcontributors in an economically active population of 2.6 million.• The system was discriminatory in its lack of coverage for the substantialnumber of non-salaried workers.• The system was vulnerable to inflation and employment fluctuations andmobility.

Promised benefits

Consequently, a new system had to be implemented that would allow the stateto reduce, and ultimately eliminate, its financial burden from the old bankruptsystem and would provide adequate benefits to guarantee the population adignified retirement from active working life. The intention was for this newsystem to have the following characteristics: a broadened reach includingsegments of the population not previously covered, in particular non-salariedworkers; capacity for self-financing; investment management transparency;potential for strengthening the stock market; capacity for continuity in timesof economic crisis; capacity to create mechanisms for maintaining the value ofpensions; capacity to increase the incomes of Bolivians over the age ofretirement.

More than five years after the implementation of pension system reforms it ispossible to assess and compare objectives, results and prospects.

The mirage of greater coverage

One of the favourite arguments of government officials and Pension FundAdministrators (PFA) in defence of the reform is that the new system hasresulted in an enormous increase in coverage. However, enthusiasm about theunprecedented growth in the number of affiliates, more than double when comparedwith the previous system, ignores the fact that at present the number of workersactually contributing to PFA-administered funds is substantially less than thenumber of affiliates.

A comparison of both social security systems’ coverage, taking into accounttheir relative size as a proportion of the economically active population,reveals that the situation has not changed significantly since the reform.Although in the year before privatization the previous system’s coverage wasless than that of the new system now, according to the National EmploymentSurvey, in 1996 the economically active population figures were higher than inthe 2001 Census and the projection for 2002.

Even worse, if we take the data used by government officials in charge ofimplementing the reform (an economically active population of 2.6 million in1996), the previous system would have a much greater coverage than the currentone, with the number of contributing workers amounting to 12% of the activepopulation.

To the discomfort of the reform’s designers and implementers, disaggregateddata on the number of affiliates per type of worker also fail to indicate anyclear superiority of the new system in extending coverage to non-salaried orindependent worker categories. According to PFA information, by June 2003 thenumber of independent workers affiliated to the pension funds was only 4.3% ofthe total number of affiliates.

The cause of this state of affairs can be found, on the one hand, with theprivate fund administration entities who, in their search for incomemaximization, tend to avoid the administration of ‘small-scale’contributions, and on the other, in the extremely low incomes of independentworkers, mostly operating in the informal sector, that do not allow for thepossibility of financing some type of saving for retirement. This second issueis further illustrated by the following data: according to the InternationalAssociation of Latin American Pension Fund Supervisors (AIOS), the averageinsurable salary in Bolivia’s individually funded system was USD 282 in 2003,while the average income of workers in the self-employed and small enterprisesectors for the same year was only USD 127, according to the National StatisticsInstitute.

The system’s unsustainability

As already mentioned, the promoters of social security reform in the countrypromised that the new individually funded system, unlike the previous one, wouldhave the virtue of being self-financing (it would not require governmentassistance), supporting itself with the profits from investment in the stockmarket.

Available information refutes the theoretical assumption that the new system’soperations would be subject to market efficiency. It is not free-market forcesthat determine investment decisions in PFA fund management. Current regulationsrequire such bodies to maintain a certain structure in their investmentportfolio with a predominance of state-issued securities. While the regulationslimit investment in foreign-issued securities to 10%, investment in publicsecurities, either of the National Treasury (TGN) or the Central Bank ofBolivia, has no limit. As much as 90% may consist of this type of investment,which explains the unusual concentrations in PFA portfolios.

In the case of the PFA Prévision, investment in TGN bonds (obligatory) amountsto USD 458 million, comprising 69% of its portfolio, and in the case of the PFAFuturo, USD 365 million, or 61% of its portfolio. This total of USD 823 millioninvested in TGN bonds represents 65% of the total funds in the IndividualCapitalization Fund (FCI).

However, according to AIOS information, by December 2002, over 69% of the FCIportfolio was in the form of fiscal securities. That is to say, apart from the65% invested in TGN bonds, 4% was invested in other state securities. Thisstate-determined investment structure arises from a deterioration in the stateof public finances, due to privatization policies, that does not allow the stateto finance public expenditure in a normal way and explains its consequentrepeated need to resort to the expedient of incurring public debt. It should beemphasized that a significant part of public expenditure is allocated to thecost of the social security system reform itself: the payment of pensions to thebeneficiaries of the previous PAYG system.

Moreover, it must not be forgotten that in the framework of an economy as smalland poor as Bolivia’s, with a weak stock market and an inefficient financialsystem, a fiscal deficit financed with FCI resources becomes a more attractiveoption for the state than what the private finance system can offer. At the sametime, an excessive dependence on public securities generates a high risk forPFAs, making them vulnerable to sudden changes in government policy.

It can consequently be inferred that the objective of efficient administrationbased on transparency in decision-making and investment has not been achieved,as the affiliates who contribute to the system, the true owners of theaccumulated funds, have no influence in decision-making over the destiny andprofitability of their savings, but rather it is public officials and politicalauthorities whose interests are met through authoritarian imposition on PFAs.

Additionally, the expected potential of the new system for strengthening thestock market did not materialize. The extreme submission of pension fundmanagement to government decisions, together with the particular characteristicsof the national economy, prevented the emergence, and therefore consolidation,of a true stock market.

It is also clear that the absence of appropriate regulations to ensure anoptimum operation of the long-term social security system, together with themarked weakness of the regulatory system for enforcing compliance with the rulesof operation, have generated a high level of employer debt with PFAs.

It is a mistake to artificially separate the situation of the individuallyfunded system from the situation prevailing in the residual PAYG pension systemthat, according to reform design, should tend to disappear, thus eliminating thefiscal expenditure that it involves. In relation to this, it can be said thatthe way in which the reform was implemented has resulted in alarming costs forthe public treasury in the form of pension payments to pensioners from the oldPAYG system, which represented more than 90% of the annual public sector deficitover the last five years.

The most worrying aspects of this situation are that such costs have to beregularly covered by taking on public debt, which incurs high interest, and thatthe obligations assumed by the state for paying such pensions have been steadilygrowing up to the present, and will continue doing so, due to commitmentsentered into by successive governments.

To summarize, this entire state of affairs has arisen because the reform’scost to the state – for payment of pensions to the beneficiaries of theprevious system – has exceeded initial predictions calculated as USD 616million over the first five years of the new system.

The aforementioned characteristics reveal the evident unsustainability of asystem operating with a logic opposite to the one that the reform was originallybased on and with an inherent dramatic contradiction that has created a kind ofreturn to the old system. In other words, the accumulated savings in the newsystem provide, at a high cost, the necessary liquidity for paying pensionersfrom the old system.

Frustrated hopes for a dignified pension

The promise of dignified pensions that would improve on the social results ofthe previous PAYG system became the main justification put forward by reformers.

However, an evaluation of results indicates a worse situation and reinforces thehypothesis that the true objectives of the reform bore little relation to theendeavour to create better living conditions for the working population.

In the first place, transforming the system has not generated a significantincrease in the number of beneficiaries, so it cannot be said that it hascontributed to a reduction in the widespread phenomenon of large social groupsbeing excluded from social security benefits.

Secondly, the promise of increased incomes has met with similar disappointment.The new scheme was designed in such a way that access to a pension is linked toa substantially longer working life and in addition it does not guarantee accessto a dignified pension for all workers. There is a special category provision inthe Law of Pensions called ‘minimum retirement’ that is applicable to aworker who has not paid enough contributions to finance a pension equivalent toat least 70% of the minimum national salary but who has reached 65 years of age.He or she will receive a pension or annual income equivalent to this percentage“until the accumulated funds are exhausted,” irrespective of whether or notthis pension covers all the remaining years of life after retirement. In short,there will be workers who only have access to a very small pension – thecurrent minimum salary is no more than USD 58 a month – for a time that willnot necessarily coincide with their remaining life span.

It is clear that the two systems are guided by different perspectives: theprevious PAYG system regarded the provision of security to workers after theiractive working life as an inescapable obligation of the state, while the newsystem abandons this state responsibility, delegating the provision of securityfor the economically inactive population to the ‘efficient’ workings of themarket.